SAYLOR, District Judge.
This is a putative class action involving alleged violations of the Securities Exchange Act of 1934 and Rule 10b-5. Local No. 8 IBEW Retirement Plan has brought suit, on behalf of a class of similarly situated persons, against Vertex Pharmaceuticals Inc. and various Vertex executives. Plaintiff contends that class members were harmed when they purchased Vertex's common stock at prices that were artificially
Defendants have filed a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) on the ground that the complaint fails to state a claim under the heightened pleading requirements for actions alleging securities fraud. It is essentially undisputed that Vertex made a false statement on May 7, 2012, when it released the interim results of a Phase II clinical study concerning a combination therapy for cystic fibrosis. For purposes of the motion to dismiss, Vertex also does not dispute that the false statement was material. The only issue is whether the complaint pleads sufficient facts to give rise to a "strong inference" of scienter, as required by law. For the reasons set forth below, defendants' motion will be granted.
Unless otherwise noted, all facts are stated as set forth in the complaint.
Vertex is a biotechnology company that researches, develops, and commercializes pharmaceuticals to treat a variety of illnesses. (Compl. ¶¶ 3, 20). The company's products include treatments for hepatitis C, HIV, and cancer. (Id. ¶¶ 3, 20). At the relevant time, Vertex was based in Cambridge, Massachusetts. (Id. ¶¶ 12, 20).
Joshua Boger, Ph.D., founded Vertex in 1989. (Id. ¶¶ 3, 13). He was formerly the Chief Executive Officer and Chairman of the Board; in 2012, he was serving as a Director. (Id. ¶ 13). Jeffrey Leiden, M.D., Ph.D., was the President and Chief Executive Officer of Vertex. (Id. ¶ 14). Peter Mueller, Ph.D., was the Executive Vice President of Global Research & Development. (Id. ¶ 15). Elaine Ullian was the co-lead independent director. (Id. ¶ 17). From 2008 to April 2011, Paul Silva served as Vice President and Corporate Controller. (Id. ¶ 16). From December 2009 to June 2012, Nancy J. Wysenski was Chief Commercial Officer and Executive Vice President. (Id. ¶ 18).
One of Vertex's products is the drug Kalydeco, which was approved by the Food and Drug Administration for use in treating cystic fibrosis in early 2012. (Id. ¶¶ 4, 22).
Cystic fibrosis is a disease that causes the body to produce abnormal amounts of mucus in the lungs and the pancreas. (Id. ¶ 23). It typically results in life-threatening lung infections and digestion problems. (Id.). Approximately 30,000 people in the United States have cystic fibrosis. (Id.). Currently, there is no cure for the disease. (Id.).
Cystic fibrosis is a genetic disease. (Id.). It is caused by mutations that affect a particular protein, so that, among other things, the protein does not properly regulate the movement of chloride in and out of the lungs. (Id. ¶ 24). The majority of cases involve the "F508del" mutation. (Id.). Approximately four percent of cases involve the "G551D" mutation. (Id. ¶¶ 22, 24).
Vertex began its Phase II trial of VX-809 and Kalydeco in combination by enrolling 108 patients for the study. (Id. ¶ 25). Patients were asked to cease their antibiotic treatments, as most cystic fibrosis patients cycle antibiotics and tend to deteriorate when off the antibiotics. (Id.). Varying dosages of VX-809 were given to patients for 28 days, followed by Kalydeco for 28 days. (Id.). The control group received placebo pills during the entire 56-day period. (Id.)
On May 7, 2012, Vertex announced in a press release that it had achieved significant "interim results" in the Phase II clinical study that combined VX-809 and Kalydeco. (Id. ¶ 28; Sylvia Aff. Ex. A).
Vertex held a conference call with analysts on May 7. (Compl. ¶ 30). During the call, Mueller, the Chief Scientific Officer, remarked that he had "never seen anything like this" and called the results "really fantastic." (Id. ¶ 30). Leiden, the Chief Executive Officer, remarked that Vertex's hepatitis C drug and Kalydeco had provided significant cash flows to the company and indicated that it would "accelerate" its investment into the next stage. (Id. ¶ 31). Wysenski, the Chief Commercial Officer, said that the potential market for the treatment was 70,000 patients, which would amount to billions of dollars of potential sales. (Id.).
At the end of the day on May 7, Vertex's stock price, which had closed at $37.41 per
The complaint alleges that defendants "turned a blind eye" to the likelihood that the released results were "too good to be true." (Id. ¶ 40). According to a confidential witness ("CW2") who was a Vertex senior director from 2004 to June 2012, the company had the results for two weeks prior to releasing them; the results "would have been sent" to defendant Wysenski and others, and a committee of executives "met to review the results to determine whether the information was material and warranted release." (Id. ¶ 41).
Between May 7 and May 23, 2012, Boger, Mueller, Silva, Ullian, and Wysenski collectively sold more than 539,000 shares of Vertex for $31.9 million. (Id. ¶¶ 35, 71; see Sylvia Aff., Exs. G, H, I).
Wysenski alone sold approximately 180,000 shares for more than $10 million on May 7 and 8 and 180,000 shares for more than $11.5 million on May 14. (Compl. ¶ 71). The complaint alleges that she "did not make stock sales even close to that magnitude in her entire tenure at Vertex." (Id. ¶ 35). According to the complaint, on June 8, 2012, Vertex "suddenly and without any forewarning," announced her retirement. (Compl. ¶ 37). She was 54 years old at the time. (Id.). The complaint alleges that her retirement was announced just "one day after [Iowa Senator Charles Grassley] complained [to the SEC] about her massive and suspicious stock sales." (Id.).
The complaint also alleges that on May 7, Mueller sold $4 million in stock, which was "uncharacteristic of his trading pattern." (Id.).
At the time of the May 7 press release, Local No. 8 IBEW Retirement Plan had not yet purchased Vertex stock. Local No. 8 purchased 2,282 shares of Vertex common stock on May 14, 2012, and 871 shares of stock on May 23, 2012. (Id. Sched. A). It paid $64.56 per share for 1,175 shares, $64.41 per share for 1,107 shares, $62.74 per share for 760 shares, and $62.09 per share for 111 shares. (Id.).
On May 29, 2012, Vertex issued a statement correcting the May 7 press release. The new disclosure explained that the data concerning improvement in lung function for patients was "relative" rather than "absolute." (Compl. ¶¶ 39, 46, 47; see Sylvia Aff. Ex. B). According to the company, the results were still statistically significant but less dramatic. (Sylvia Aff. Ex. B at 1). During a conference call that day, Vertex attributed the error to a "misinterpretation between Vertex and [its] outside statistical vendor concerning the type of responder analysis performed." (Compl. ¶¶ 47, 50).
According to two confidential witnesses, CW1 and CW2, a Vertex employee received the raw data and should have realized that the data was "suspect." (Compl. ¶¶ 41, 48). Thus, according to the complaint, the error actually occurred within Vertex, not with the vendor. (Compl. ¶ 49).
On the May 29 news, the stock price fell from a close of $64.85 on May 25, 2012 to a close of $57.80 on May 29, 2012. (Compl. ¶ 50). According to the complaint, the price change represented the "stock's greatest decline in three years."
According to defendants, in January 2013, the FDA granted the combination therapy a "Breakthrough Therapy Designation" based on the Phase II trial results. (Def. Mem. at 5-6). "Vertex went on to conduct pivotal Phase 3 studies of Kalydeco and VX-809, and in November 2014, after the results of the trials showed significant improvements in lung function and other `endpoints,' Vertex submitted a New Drug Application to the FDA for the combined therapy." (Def. Mem. at 6).
Vertex and its executives were previously sued by the City of Bristol Pension Fund for alleged violations that overlap with the allegations in the present case. See City of Bristol Pension Fund v. Vertex Pharmaceuticals, Inc. 12 F.Supp.3d 225 (D.Mass.2014). The City of Bristol Pension Fund brought suit on September 6, 2012, on behalf of all purchasers of Vertex common stock between May 7, 2012, and June 28, 2012. Id. Although it was undisputed that Vertex made a false statement on May 7, 2012, Bristol did not purchase stock until after Vertex corrected the statement on May 29. Id. As a result, the Court
On May 28, 2014, Local No. 8 filed a complaint on behalf of all purchasers of Vertex common stock between May 7, 2012, and May 29, 2012. The complaint alleges that Vertex and the individual defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5; that the individual defendants violated Section 20(a) of the 1934 Act; and that defendants Boger, Mueller, Silva, Ullian, and Wysenski violated Section 20A of the 1934 Act.
Defendants have moved to dismiss the complaint under Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted.
On a Rule 12(b)(6) motion to dismiss a claim brought under Section 10(b) and Rule 10b-5, courts must, as with any such motion, accept plaintiff's allegations as true. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). However, Congress has raised the standard of pleading for Section 10(b) and Rule 10b-5 securities fraud claims.
In evaluating the adequacy of a complaint, a court "cannot hold plaintiff to a standard that would effectively require them, pre-discovery, to plead evidence." Mississippi Pub. Employees' Ret. Sys. v. Boston Scientific Corp., 523 F.3d 75, 90 (1st Cir.2008) (quoting Shaw v. Digital Equipment Corp., 82 F.3d 1194, 1225 (1st Cir.1996)). Courts should look at the complaint "as a whole" and weigh "competing inferences" in a "comparative evaluation" of plaintiff's allegations and alternative inferences from those allegations. ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 59 (1st Cir.2008); see also Tellabs, 551 U.S. at
Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful "[t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). Pursuant to that section, the SEC promulgated Rule 10b-5, which makes it unlawful:
17 C.F.R. § 240.10b-5. Section 10(b) requires proof of six elements: "(1) a material misrepresentation or omission; (2) scienter, or a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation." Mississippi Pub. Employees' Ret. Sys. v. Boston Scientific Corp., 649 F.3d 5, 20 (1st Cir.2011) (quoting City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters Corp., 632 F.3d 751, 756 (1st Cir.2011)).
Again, there is no dispute that the May 7 press release inaccurately reported the interim results in the Phase II clinical study in terms of "absolute" improvement in lung function, when the data given actually reflected "relative" improvement. Furthermore, for the purposes of the motion to dismiss, there is no dispute that the discrepancy was material. The only issue is whether the complaint states with particularity facts that give rise to a strong inference of scienter.
To be actionable, a statement must not be merely material and misleading; it also must have been made with the requisite scienter. ACA Fin., 512 F.3d at 58. "Scienter is `a mental state embracing intent to deceive, manipulate, or defraud.'" Id. (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976)).
To establish scienter, the pleaded facts must give rise to a "strong inference" that the defendant had actual knowledge that the representation or omission was misleading. 15 U.S.C. §§ 78u-4(b)(2)(A), (f)(10)(A). Scienter "should be evaluated with reference to the complaint as a whole rather than to piecemeal allegations." ACA Fin., 512 F.3d at 59. "It does not suffice that a reasonable factfinder plausibly could infer from the complaint's allegations the requisite state of mind." Tellabs, Inc., 551 U.S. at 314, 127 S.Ct. 2499. Instead, the court must "engage in a comparative evaluation" and weigh "competing inferences" to determine whether the inference of scienter is "cogent and compelling." Id. at 314, 324, 127 S.Ct. 2499. A "`strong inference' of scienter `must be more than merely plausible or reasonable — it must be cogent and at least
"In this circuit, a plaintiff may satisfy the scienter requirement with a showing of either conscious intent to defraud or `a high degree of recklessness.'" Id. (quoting Aldridge v. A.T. Cross Corp., 284 F.3d 72, 82 (1st Cir.2002)); see also Mississippi Pub. Employees' Ret. Sys., 649 F.3d at 20 ("Scienter is an intention to deceive, manipulate, or defraud." (internal quotation marks omitted)). "Recklessness in this context means `a highly unreasonable omission, involving not merely simple, or even inexcusable[] negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious the actor must have been aware of it.'" Mississippi Pub. Employees' Ret. Sys., 649 F.3d at 20 (quoting SEC v. Fife, 311 F.3d 1, 9-10 (1st Cir.2002)). "Even if plaintiffs wish to prove scienter by `recklessness,' they still must allege with sufficient particularity, that defendants had full knowledge of the dangers of their course of action and chose not to disclose those dangers to investors." Maldonado v. Dominguez, 137 F.3d 1, 9 n.4 (1st Cir.1998).
"There is no set pattern of facts that will establish scienter; it is a case-by-case inquiry." ACA Fin., 512 F.3d at 66. Compelling evidence of scienter most often includes "clear allegations of admissions, internal records or witnessed discussions" that suggest that defendants were "aware that they were withholding vital information or at least were warned by others that this was so" when they made the misleading statements. In re Boston Scientific Corp. Sec. Litig., 686 F.3d 21, 31 (1st Cir.2012). In addition, courts have "considered many different types of evidence as relevant to show scienter," including
Greebel v. FTP Software, Inc., 194 F.3d 185, 196 (1st Cir.1999) (citations omitted). In addition, various other "facts and circumstances indicating fraudulent intent — including those demonstrating motive and opportunity" — may also combine to satisfy the scienter requirement. In re Cabletron Systems, Inc., 311 F.3d 11, 39 (1st Cir. 2002). The "presence of [contemporaneous] insider trading can be used, in combination with other evidence, to establish scienter." Biogen IDEC Inc., 537 F.3d at 55. However, "[i]nsider trading cannot establish scienter on its own, but rather can only do
Plaintiff's theory of scienter here has two components: first, that the results released to the public were "too good to be true," and that defendants "turned a blind eye" to whether they were accurate or not; and second, that various insiders sold large amounts of stock after the price rose in the wake of the inaccurate announcement. There is no doubt that those allegations are plausible, or even that they could support some inference of scienter. The question, however, is whether they support a "strong inference" of scienter as the law requires.
The central allegation of the complaint is that the individual defendants were willfully blind to the possible inaccuracy of the original test results: that the study results were "too good to be true," and that defendants, rather than checking the results of the tests, "turned a blind eye, accepting and promoting unlikely data that offered them a windfall on the sale of their stock." (Compl. ¶ 40). The complaint further alleges that "[b]y recklessly publishing suspect test results, [d]efendants were able to buoy the share prices of Vertex which had just recently massively declined due to competition from other producers of Hepatitis C medications." (Id.). "During the spike in the stock prices resulting from the false and misleading statements, the [i]ndividual [d]efendants... then rushed to sell off enormous amounts of stock for immense personal gains." (Id.).
The complaint alleges that "[d]esperate to prove itself after Hepatitis C losses, and to provide a vehicle for the [c]ompany's senior officers and directors to cash in on sales of their stock, [d]efendants issued preliminary results" of the Phase II testing of the combination of the experimental drug VX-809 and Kalydeco to treat CF patients with homozygous F508del genes in order "to allow Vertex to fast-track its CF study." (Compl. ¶ 28). In a May 7, 2012 press release, Vertex announced it "had achieved strikingly successful results in its clinical Phase 2 study." (Id.). It reported its results in terms of "absolute improvement" instead of "relevant improvement." (Id.). Vertex executive Christopher Wright was quoted as saying the results "exceeded our expectations." (Id. ¶ 29). In describing the lung improvement data during a May 7 conference call, Mueller stated that he "ha[d] never seen anything like this." (Id. ¶ 30). Leiden stated that Vertex was "very pleased to have obtained these results" and that "[p]ending final data this summer and discussions with regulators, [Vertex] looks forward to accelerating the development of [its] CF combination regiment for homozygous Delta 508 CF patients." (Id. ¶ 31). During the conference call, Wysenski "reminded analysts that the unserved market for patients who are homozygous and stood to benefit from this combination product exceeded 70,000 patients, a market involving billions of dollars of potential sales." (Id.). Vertex vice president Michael Partridge stated that the "early data exceeded our expectations and have accelerated the plans for this development program. These data allow us to move forward quickly with the next step...." (Id. ¶ 32). On a call the next day, CFO Ian Smith stated that "[t]hat is what drove us to the announcement — the acceleration of the program, and the data being beyond our expectations to drive as quickly into a phase III program with the confidence to run a phase III program around an FEV end point." (Id. ¶ 33).
The complaint contains no specific allegations (whether from a confidential witness, a document, or otherwise) that any
Through three confidential witnesses, the complaint alleges that Vertex had access to the results for two weeks prior to the press release (Compl. ¶ 41); that unnamed individuals at Vertex "were highly skeptical of the applicable study because there was a noted lack of sweat chloride improvements" (Id. ¶ 42) (emphasis in original); and that "it was actually known `for some time' within Vertex that VX-809 ... decreased the effectiveness of Kalydeco" (Id. ¶ 43). According to the complaint, the "results would have been sent to ... Wysenski among others, through the normal course of business." (Id. ¶ 41)). In addition, "a committee of Vertex executives met to review the results to determine whether the information was material and warranted release." (Id.). It alleges that "[t]herefore, [d]efendants had access to the study results prior to their release and should have known, or at least verified, that the suspect results were unrealistic and unreliable." (Id.). It also alleges that "the data announced on May 7, 2012 was just `too beautiful' and [d]efendants would have known that the results were out of the ordinary and needed to be checked." (Id. ¶ 42). It alleges that "[d]efendants could easily have confirmed the percentage improvement calculations reported by Vertex's vendor simply by reviewing the results actually reported, patient by patient." (Id. ¶ 43).
The principal problem with the complaint is that the "cogent and compelling inference" arising out of those factual allegations is that the defendants were negligent. Again, although the complaint alleges that defendants had the results for two weeks before publishing the press release, there are no allegations that any individual defendants actually knew anything. Rather, the complaint alleges — in a conclusory fashion — that because defendants had access to the study results prior to their release, they "should have known, or at least verified, that the suspect results were unrealistic and unreliable." (Compl. ¶ 41).
The complaint seeks to bolster that inference by alleging that "[d]efendants could easily have confirmed the percentage improvement calculations reported by Vertex's vendor simply by reviewing the results actually reported, patient by patient." But aside for Wysenski, the complaint contains no allegations that any specific defendant actually had access to the raw data (as opposed to the results). And it includes no allegations explaining the factual basis for the assertion that defendants could "easily" have reviewed the results actually reported. Indeed, from the complaint, it is unclear whether such a review would have readily identified the error. The complaint alleges that "the individual at Vertex tasked with receiving the raw data, a pulmonologist by trade, should have known about the suspect nature of the data, regardless of how it was presented by the vendor." (Compl. ¶ 48). But that suggests not only that the reporting of the error was the result of a mistake, but that the mistake was not caught by a trained specialist. The complaint fails to allege, at least with any specificity, that any of the individual defendants had the responsibility to check the reported results or that they had the ability to detect the discrepancy if they did conduct such a review.
Plaintiff relies on In re VeriFone Holdings, Inc. Securities Litigation, 704 F.3d 694 (9th Cir.2012), and In re Carter's Securities Litigation, 2012 WL 3715241 (N.D.Ga. Aug. 28, 2012), in support of its contention that the requisite standard has been met. In In re VeriFone Holdings, investors filed a securities fraud class action against VeriFone Holdings, Inc. and two executives, alleging that in the after-math of a merger with Lipman Electronic Engineering Ltd., Verifone reported inaccurate financial statements in three consecutive quarters. 704 F.3d 694.
In the aftermath of the merger, "VeriFone's preliminary internal reports accurately showed it had fallen short of its earnings and gross margins projections." Id. at 698. "Three consecutive times, VeriFone's CEO and CFO supervised accounting staff as they made baseless multimillion-dollar adjustments that brought reported results in line with expectations." Id. "Each time, the CEO and CFO accepted the adjustments without question, representing publicly that a recent merger was driving the company's success even as the adjustments grew in size and negatively impacted key metrics." Id. The Ninth Circuit found that the "allegations, viewed holistically g[a]ve rise to a strong inference that" the CEO, CFO, and Veri-Fone "were deliberately reckless to the truth or falsity of their statements regarding VeriFone's financial results, particularly gross margin percentages." Id. at 708. It determined that it "defie[d] common sense that for three straight quarters following a merger, when preliminary reports came in substantially below expectations and the acquired company had lower margins, the correct `adjustments' to flash reports also happened to be the precise amounts" the CEO and CFO "had identified as necessary to hit earnings targets." Id. at 709. "In the face of repeated such adjustments, the company cannot simply close its eyes with a sigh of relief." Id. The complaint contained detailed allegations that the CEO and CFO "were hands-on managers with respect to operational details and financial
In In re Carter's, Inc. Securities Litigation, 2012 WL 3715241 (N.D.Ga. Aug. 28, 2012), a class action was filed "against Carters, Inc., certain Carter's officers and directors, and Carter's outside auditor [PricewaterhouseCooper LLP], for an alleged fraudulent financial `smoothing' scheme involving the improper `booking' of accommodations." Id. at *1.
The allegations here fall far short of those in Verifone and Carter's. Unlike in Verifone, defendants did not respond to disappointing numbers by having adjustments made that brought the numbers in line with expectations. There are no allegations that defendants oversaw or took part in any adjustments of the preliminary results prior to release from the public. Rather, the allegations in this case are that defendants should have questioned the initial results because they were too impressive. Likewise, and unlike Carter's, the allegations here lack details as to why the error should have been obvious to defendants or how they could have caught it, and there are no allegations that the defendants failed to perform their basic job responsibilities.
In short, there is little doubt that the complaint alleges a claim of negligence. But those allegations, without more, do not rise to the level of an "extreme departure from the standard of ordinary care" that "presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious the actor must have been aware of it." Mississippi Pub. Employees' Ret. Sys., 649 F.3d at 20.
This case would present a relatively easy case for dismissal if it were not for the allegations of insider trading. The complaint alleges that five executives collectively sold more than 539,000 shares of Vertex stock for $31.9 million during the relevant period and that the stock sales "were especially unusual when compared to their trading history before and after the Class Period." Plaintiffs allege, in substance, that the allegations of insider sales is sufficient, in combination with the claimed recklessness in reporting the test results, to raise a strong inference of scienter.
As noted, "[i]nsider trading cannot establish scienter on its own, but rather can only do so in combination with other evidence." Mississippi Pub. Employees' Ret. Sys., 649 F.3d at 29; see also Biogen IDEC, 537 F.3d at 55 ("If there is reason to be concerned about material omissions or misrepresentations, the presence of insider trading can be used, in combination with the other evidence to establish scienter."); Greebel, 194 F.3d at 198 ("We similarly
Plaintiff alleges that five of the six individual defendants (all but Leiden) "collectively sold tens of millions of dollars in stock immediately following the announcement." (Compl. ¶ 35). The lion's share of those sales were by Wysenski, who sold more than $21.5 million worth of shares beginning on May 7, the date of the announcement. The complaint alleges that the sales activity prompted Senator Grassley to write a letter to the chair of the SEC on June 7, asking that an investigation be conducted into the trades, and that the next day, June 8, Wysenski retired.
Plaintiff alleges that it is a plausible inference that Wysenski retired abruptly, and was essentially pushed out by the company, in response to the unfavorable publicity concerning the insider sales. Defendants, however, respond that the most plausible inference is the simplest one: because Wysenski was separating from the company, she exercised options that might otherwise expire within a relatively short time frame. Defendants also contend that at least some of Wysenski's sales were made pursuant to a Rule 10b5-1 plan.
As an initial matter, there is nothing unusual, or necessarily suspicious, about insider sales during periods of rapid stock price increases. It is commonplace for executives at publicly-traded companies to hold low-basis stock in the company or stock options with relatively low strike prices. Stock options normally have exercise periods, which may be accelerated if the employer leaves the company. See Greebel, 194 F.3d at 206. Moreover, the portfolios of corporate insiders are often heavily weighted with the stock of the company. It is hardly surprising that such executives have a strong incentive to cash out at least some portion of their holdings when prices are high. See Isham v. Perini Corp., 665 F.Supp.2d 28, 38 (D.Mass.2009) (even if allegation that insider sold all of his shares during class period supports an inference of scienter, "with respect to a motion to dismiss, `even unusual sales by one insider do not give rise to a strong inference of scienter.'" (quoting Biogen IDEC Inc., 537 F.3d at 56)).
It is undisputed that Wysenski retired on June 8 (or at least that her retirement was announced that day). There is, however, an entirely plausible explanation for her exercise of options and sale of stock: she was leaving the company. "It is not unusual for individuals leaving a company, like [Wysenski], to sell shares. Indeed, they often have a limited period of time to exercise their company stock options." Greebel, 194 F.3d at 206. If any inference of scienter can be drawn from Wysenski's stock sales, it is far from strong. See Lenartz v. American Superconductor Corp., 879 F.Supp.2d 167, 186-87 (D.Mass.2012) (retirement of individual defendant provides context for large sum of sales that tends to negate inference of scienter).
The trading behavior of Boger does not appear to be suspicious even in light of the chart provided by plaintiff. Boger's sales appear to occur in consistent
There are thus plausible and nonculpable explanations for the insider sales. See Tellabs, 551 U.S. at 324, 127 S.Ct. 2499. Indeed, as to many of the trades, there is a complete absence of any allegation, other than mere timing, that the trades were unusual and did not reflect normal trading patterns. The trades by Wysenski, in particular, have an entirely plausible explanation. Thus, while the allegations of insider trading no doubt add some weight to the claim of securities fraud, they are not sufficient to push the claim over the high bar set by Congress.
In summary, the allegations of the complaint fail to create a "strong inference" of securities fraud, as required by law. Accordingly, the motion to dismiss the claim under Rule 10b-5 will be dismissed.
Section 20(a) of the Exchange Act imposes joint and several liability on persons in control of entities that violate securities laws. 15 U.S.C. § 78t. Section 20A of the Exchange Act provides that an insider who trades stock "while in possession of material, nonpublic information" is liable to any person who traded contemporaneously with the insider. 15 U.S.C. § 78t-1(a). However, violations of Section 20(a) and 20A each depend on an underlying violation of the Exchange Act. 15 U.S.C. § 78t-1(a); Waters, 632 F.3d at 762 ("Because the plaintiff's Section 20(a) claim was derivative of the Rule 10b-5 claim, it was properly dismissed as well."); ACA Fin. Guar. Corp., 512 F.3d at 67-68; Carney v. Cambridge Tech. Partners, Inc., 135 F.Supp.2d 235, 257 (D.Mass.2001) ("To state a claim for insider trading, the plaintiffs must have adequately alleged a violation of the Exchange Act."). Because no underlying securities violation exists here, the second and third counts of the amended complaint will be dismissed.
For the foregoing reasons, defendants' motion to dismiss is GRANTED.
Defendants likewise contend that seven of the ten trades (three by Boger, two by Mueller, and two of three by Wysenski) were made pursuant to Rule 10b5-1 plans. (See Sylvia Aff. Ex. G, H, I). Again, the Court cannot consider that evidence at this stage.
